3 High-Momentum Health Care Stocks That Will Keep Their Mojo in 2016
Think of it as the "health-industrial complex," with virtually nothing in the way of its tremendous multiyear momentum. According to the U.S. Centers for Medicare and Medicaid Services, total health care spending in the U.S. should grow to nearly $5 trillion by 2021 from roughly $3.8 trillion in 2014.
This week, as corporate earnings season continues to exceed expectations, among the biggest winners have been health care stocks. The Health Care Select Sector SPDR ETF (XLV) - Get Report is up 7.6% year to date, compared with a gain of about 2.3% for the S&P 500.
Below are three health care stocks that are on track to continue their upward trajectory into 2016 and beyond. You should grab them now, before their share prices appreciate further. These stocks are tapped into opportunities that will generate trillions of dollars in profits for decades: Express Scripts (ESRX) , Medtronic (MDT) - Get Report, and Cerner (CERN) - Get Report . After the markets closed on Tuesday, Cerner reported robust third-quarter earnings and revenue growth, which we'll explore in greater detail below.
1. Express Scripts
By far, the largest pharmacy benefit manager in the U.S. is Express Scripts, which boasts a 40% share of U.S. prescriptions. More than 210 million Americans nationwide obtain drug benefits administered by PBMs; 100 million of them fall under Express Scripts' umbrella.
PBMs are third-party administrators of prescription drug programs. They also contract with pharmacies and negotiate discounts and rebates with drug manufacturers. PBMs are experiencing huge growth, as employers and government agencies increasingly use them to foster economies of scale and to play hardball with health care providers.
The U.S. Department of Health and Human Services estimates that health care administrative costs in the U.S. will reach $315 billion in 2018, up from $160 billion in 2013. These costs now consume about 7% of the overall health care dollar. HHS expects this percentage to hit double digits by the end of the decade. Most health care administrative expenses are devoted to intermediaries that process and pay claims, such as PBMs.
Express Scripts' clients include large corporations, government agencies and major insurance carriers. The company uses its expertise and sheer size to negotiate favorable rates with drugmakers.
Express Scripts also is the country's third-largest retailer of drugs, through its prescription mail order arm, which generates $33 billion a year, a third of the company's total revenue.
Express Scripts is among three PBMs that recently announced they would sever ties with Philidor RX Services, a pharmacy with which scandal-plagued Valeant Pharmaceuticals has partnered, over alleged pricing improprieties.
Express Scripts, CVS Health and OptumRx, a division of UnitedHealth Group all said they were removing Philidor from their networks.
Regardless, Express Scripts' client base is likely to grow, as major organizations continue to outsource the administration of drug benefits, and as Obamacare provides drug benefits to more people.
Last week, Express Scripts reported third-quarter earnings of $661.7 million, for a year-over-year gain of 14%. Adjusted diluted earnings per share were $1.45, up 12% year over year. The stock is up 3.9% year to date.
Management raised its guidance for adjusted EPS in full-year 2015 to the range of $5.51- $5.55, up from the previously estimated range of $5.46- $5.54, reflecting 13%-14% year-over-year growth. The stock has a trailing-12-month price-to-earnings ratio of 27, a bargain compared to the P/E of 46 for the health care sector.
2. Medtronic
Medtronic is a developer, manufacturer and marketer of medical devices for use in clinical and home settings. The company offers laparoscopic instruments, surgical staplers, soft tissue repair products, hernia mechanical devices and a host of vascular products. The company also offers nursing care products for incontinence, wound care, enteral feeding, urology and suction products, as well as accessories, electrodes, thermometry, chart paper and syringes.
Because of their close interaction with the human body, medical devices also facilitate the collection of copious amounts of patient information. Data management is another significant growth driver in the health care sector.
The 2009 American Recovery and Reinvestment Act, known as "the Stimulus Bill," includes a total of $19.2 billion that's designated as financial incentives to health care providers to implement electronic health records (EHRs).
Companies such as Medtronic are becoming adept at collecting and interpreting this data, to create tools that enhance patient care and safety, opening opportunities for new products down the road.
In January 2015, shareholders of medical device maker Covidien and Medtronic approved the acquisition of Covidien by Medtronic in a cash-and-stock transaction, making Medtronic the largest player in this vital market.
On Sept. 3, Medtronic reported first-quarter fiscal 2016 worldwide revenue of $7.274 billion, an increase of 70%. First-quarter adjusted earnings came in at $1.46 billion and EPS at $1.02, up 47% and 3%, respectively. The stock is up about 5.6% year to date and has a trailing P/E of about 35, well below that of its peers.
3. Cerner
Cerner is the largest publicly traded provider in the U.S. of information technology solutions for health care organizations. The company's "Cerner Millennium" software combines clinical, financial and management information systems that allow health care providers to access an individual's EHR at the point of care.
The company's clients include physicians, nurses, laboratory technicians and pharmacists. Cerner is the world leader in the booming field of EHRs. As part of the Obama administration's American Recovery and Reinvestment Act of 2009, the Health Information Technology for Economic and Clinical Health (HITECH) Act implemented substantial financial incentives for hospitals and physicians in the form of higher Medicare reimbursements to encourage the adoption of EHRs.
EHRs not only reduce costs and eliminate administrative waste, but also enhance the quality of care. Adding urgency to EHR adoption are HITECH's strict penalties on health care providers for not doing so.
On Tuesday after the markets closed, Cerner reported that adjusted earnings for third-quarter 2015 were $188.7 million, compared with $145.3 million in the same period a year ago. Diluted EPS came in at 54 cents, an increase of 29% year over year and equal to analysts' consensus estimates. Bookings were $1.59 billion, an all-time high and a year-over-year increase of 44%. Third-quarter revenue was $1.13 billion, a year-over-year increase of 34%. The stock's trailing P/E now stands at about 46, roughly in line with its sector.
The upshot: These health care stocks are riding long-term tailwinds that make them superb "core holdings" in any growth portfolio.
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John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.